Securities and Exchange Commission v. Bronson

Background

The Securities and Exchange Commission (SEC) sought an order holding Edward Bronson and Dawn Bronson in civil contempt for violating earlier court orders. The relevant orders included the 2017 amended final judgment, a 2021 payment-plan order, and orders appointing a liquidating trustee to sell securities and apply the proceeds toward the judgment.

The amended final judgment permanently barred the defendants from violating Section 5 of the Securities Act of 1933 and from participating in penny-stock offerings. It also ordered Edward Bronson, E-Lionheart Associates, and Fairhills Capital, Inc. to pay specified disgorgement and prejudgment interest, and imposed civil penalties on Edward Bronson and E-Lionheart. The Second Circuit affirmed the final judgment.

The payment-plan order required Edward Bronson to make an initial payment of $1.1 million, ten additional monthly payments of $1.1 million, and a final payment covering the remaining amounts. The order also provided for a court-appointed liquidator to sell securities in a specified brokerage account and other accounts designated by Edward Bronson. The court appointed Ryan Stumphauzer as liquidating trustee.

Before the motion addressed in this opinion, Edward Bronson had been held in contempt several times for failing to comply with the court’s orders and was arrested on February 16, 2022. In June 2023, the court permitted his release subject to conditions, including financial disclosures, payments based on his gross monthly earnings, and a continuing obligation to remain in contempt until the outstanding disgorgement was paid in full.

Edward Bronson’s Conduct

The opinion states that, without seeking the court’s permission or notifying the SEC, Edward Bronson directed the removal of the court-appointed liquidating trustee. He also admitted directing the sale of approximately $2 million in shares from the brokerage account between February 22 and August 8, 2022, in violation of the liquidation order. He admitted that directing the sales required activity violating the penny-stock bar and that none of the sale proceeds was paid to the SEC.

Edward Bronson also admitted that, after the sales, he acted to have the brokerage account replenished with penny-stock shares from the same issuers. Dawn Bronson executed the trades that liquidated the securities. The court rejected Edward Bronson’s argument that he did not believe the penny-stock bar applied to selling securities in his own account, finding that the relevant orders were clear and unambiguous. The court also rejected the significance of his argument that the orders did not independently restrict Top Knot or John Kellas, because Edward directed the sales and was the ultimate beneficiary of them.

Dawn Bronson’s Conduct

The opinion states that Dawn Bronson knew about the liquidation order. The court found that she assisted Edward by directing John Kellas to remove the liquidating trustee and by diverting stock-sale proceeds away from payment of the judgment.

The proceeds were transferred to a Top Knot bank account that Dawn Bronson testified she alone could access. The record showed that she used the account to pay family expenses, including salon visits, a European vacation, and a mortgage. She also transferred hundreds of thousands of dollars for her personal benefit, including more than $170,000 in wires and another $13,500 to V2IP, Inc., an entity held in her name. She withdrew $157,537.48 in cash from the account between February 25 and September 29, 2022.

Legal Standard

Civil contempt is intended to coerce compliance with a court order or compensate for harm, rather than punish. To establish civil contempt, the moving party must show by clear and convincing evidence that the order was clear and unambiguous, that the alleged violation was proven clearly and convincingly, and that the alleged contemnor did not make a diligent, reasonable effort to comply. A willful violation is not required.

A nonparty may be held in contempt for aiding the named party’s contempt. The moving party must show that the named party committed contempt and that the other person assisted in that contempt. After the moving party makes the required showing, a person claiming complete inability to pay bears the burden of proving that inability clearly and in detail.

Rulings on Contempt

The court found by clear and convincing evidence that Edward Bronson repeatedly violated each of the orders identified by the SEC and directed actions that violated the penny-stock bar. It therefore found Edward Bronson in contempt.

The court also found that Edward Bronson committed contempt and that Dawn Bronson knowingly assisted him. It therefore found Dawn Bronson in contempt as well. The court agreed that coercive and remedial sanctions were necessary because of the Bronsons’ continued conduct and their failure to make an appreciable payment toward the judgment.

Sanctions and Other Relief

The court ordered Edward and Dawn Bronson to provide complete, sworn accountings of their domestic and foreign assets, their children’s assets, and assets of entities with which they were directly or indirectly connected. The required disclosures cover liquid and illiquid assets, real and personal property, cash, and financial accounts they owned, controlled, could access, or beneficially held, including accounts held in the names of John Kellas or their children.

They also must provide sworn accountings and supporting documents for the previous two years for entities they control, including V2IP, Inc., Top Knot Inc., Top Knot Inc. USA, MacCallan Partners Assets, LLC, and Baby China. Until the judgment is paid in full, they must provide the SEC each month with statements for accounts they control, records for methods used to pay expenses, mortgage statements and payment sources, certain household and insurance bills and payment sources, and legal bills and payment sources. They must obtain court permission before opening a new account, line of credit, or entity and must promptly notify the SEC of funds received from any source in an amount of $1,000 or more.

As to Edward Bronson, the court ordered disgorgement of approximately $2 million in alleged ill-gotten gains from the contemptuous conduct, plus prejudgment interest. The court described this as an additional coercive sanction beyond amounts already owed under the judgments and directed the SEC to submit a proposed disgorgement order for approval.

As to Dawn Bronson, the court ordered disgorgement of interest on the approximately $2 million in sale proceeds, calculated at the statutory rate referenced in 28 U.S.C. § 1961 from February 16, 2022, until Edward Bronson repays the $2 million. The court again directed the SEC to submit a proposed disgorgement order for approval.

The SEC also sought turnover orders for cash held by various custodians. The court directed the SEC to provide an accounting of the outstanding funds and proposed turnover orders for the court’s review and approval. The court granted the SEC’s motion and directed the clerk to terminate the pending motions.